This article is part of a series of blog posts on forest carbon economics. These bite-sized posts are adapted from SilviaTerra’s white paper “Forests and Carbon: A Guide for Buyers and Policymakers.”
The RISE Framework
Even in the absence of a concerted forest-based climate policy, the total landscape of forest carbon in the United States has been increasing by about 446 million tons per year. In fact, US forest growth has exceeded total harvests and mortality since at least 1976.
A forest carbon strategy can be deemed Real if it increases total landscape forest carbon relative to what would have happened in the absence of the strategy. This is the first and most fundamental test of a potential strategy. We must determine that it demonstrably changed an individual landowner’s behavior on that particular property, and also that the change was not canceled out by resultant changes on other properties across the landscape.
Simply paying landowners to maintain their “business as usual” (BAU) does not create a ‘Real’ climate impact. The goal of an effective forest carbon strategy is to create “additional” forest carbon on the landscape above and beyond BAU. This is a concept known as “additionality.”
The clarity of BAU varies widely depending on the type of forest carbon strategy. For example, in the context of an afforestation strategy, the presumptive BAU is very clear—BAU is that the land is not and will not be covered by forest without intervention.
BAU in IFM strategies
BAU is more complicated in Improved Forest Management (IFM) carbon projects. In these projects, forest carbon stocks are increased above BAU baseline by deferring timber harvests. Appropriate accounting in IFM projects thus requires an understanding of the forest economics that drive timber harvesting behavior.
While the nuances of forest economics certainly vary across regions and types of forestry, the core principles can be understood by considering a plantation context.
Similar to crops like corn, trees in a plantation setting are planted, grown, and harvested. Unlike corn, however, the growing period (or the “rotation age”) for trees is measured in decades rather than months.
For any acre of forest, the economically optimal rotation age can be determined by considering the costs of planting, tree growth rates, prices paid for various timber products, harvesting costs, transportation costs to the mill, and the landowner’s financial discount rate. Combining all of these factors together results in a graph that shows how a particular landowner’s net present value (NPV) of owning the forest changes as the rotation age increases. Landowners harvest when NPV is maximized.
NPV approximates a bell-shaped curve. Generally the, value increases as long as the value of harvestable timber increases faster than the discount rate, then reverses as the biological growth rate of the trees slows.
This graph has several implications for IFM strategies:
By definition, landowners should not need to be paid to manage their forests to an economically optimal rotation age—in the absence of any external payments, they will choose to do so anyway. As a corollary, any payments aimed at preventing landowners from managing to a shorter, economically sub-optimal rotation age would be redundant and not result in additional sequestration.
Conversely, landowners must be paid to extend the rotation age of their forest past the economically optimal point. In the absence of additional payments, the NPV of their forest declines. But for a large enough payment, the landowner might change their behavior and choose to defer harvest for some period of time.
Deferring harvest by a few years is “cheap” because the NPV curve is relatively flat near the economic optimum. However, the further a rotation is extended, the more expensive it becomes to compensate the landowner as NPV drops significantly.
Determining optimal rotation age from an NPV curve is trivial, but the construction of an NPV curve requires detailed data about every acre of a forest as well as other economic variables. However, this level of detail is absolutely necessary to develop a realistic, landowner-specific model of BAU harvest behavior.
Why does this matter?
Recall that BAU is critical to additionality, and additionality is required for Real impact at the property level.
Without a realistic BAU assessment, strategies run the risk of adverse selection, where payments are made to landowners to behave in ways that they might have behaved already. In extreme cases, landowners could get paid for forest carbon that would have been sequestered on their property whether they were paid or not.
Far from being an abstract concern, coarse BAU assessment has led to serious challenges for the real-world California Air Resources Board (CARB) Forest Offset Protocol.
The CARB protocol rules classify each acre of forest into one of several regional categories like “Central California Coast Redwood/Douglas-fir Mixed Conifer” or “Florida Coastal Plains Central Highlands Oak-Hickory.” Each of these categories has a “common practice” baseline regional average level of carbon per acre associated with it, and forest properties with average carbon levels above this baseline can enroll in the program. Landowners receive an upfront payment for existing carbon above the baseline and are required to manage their forest over time in a way that maintains or increases forest carbon levels even further above the baseline. This “common practice” approach was adopted in response to the difficulty of setting a baseline for each individual property, which was more challenging at the time of CARB protocol design given data and computational limitations.
But historical limitations aside, the result is that if some landowners have already chosen, or would choose in the future, to manage above that baseline level or increase carbon levels for any reason (e.g. because they lack access to local timber markets), then they are eligible to receive payments that are not in fact necessary to maintain or increase the forest carbon on their properties. This adverse selection threatens to significantly reduce the additionality of the CARB protocol and is a persistent problem for coarse long-term IFM strategies.
For more on this subject read SilviaTerra’s white paper “Forests and Carbon: A Guide for Buyers and Policymakers.”